Doubts cast over Treasury guarantee plan

By Alex Barker and Paul J. Davies

The Bank of England questioned a Treasury-endorsed plan to guarantee mortgage-backed securities on Tuesday, arguing for better ways to revive home lending.

Mervyn King, governor, said he was un­convinced by Sir James Crosby’s proposal to extend about £100bn ($154bn) of guarantees if its purpose was to resurrect a “form of lending that for rather good reason has fallen out of favour”.

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Alistair Darling lent his broad support to the proposals on Monday and said his officials were working on a “detailed scheme” based on the recommendations.

Mr King urged the chancellor to reflect on how such a scheme would interact with other measures introduced in the banking bail-out, not least the £250bn credit guarantee scheme. This allows banks to raise funding backed by the government with a maturity of up to three years.

The Treasury heeded the call and launched a “quick review” of the scheme to see if it had any implications for the proposals. The aim will be to “maximise its impact on financial and wider economic stability while ensuring that it does not crowd out market-based lending”.

Mr King told the Treasury select committee it “did not make sense to have two completely separate packages”.

Calling for an “integrated approach”, he said: “It would make sense to have the credit guarantee scheme that offers guarantees for unsecured borrowing.”

Offering guarantees to a narrow range of debt products would be a “big mistake” that would distort lending priorities. “The Crosby scheme is restricted to only one type of lending,” he said. “It would be a big mistake to generate lending for the mortgage market at the expense of crowding out lending to business.”

Sir James’s “strong recommendation” was for the government to auction guarantees to be attached by lenders to triple-A tranches of mortgage-backed securities issued to fund new lending.

The plan won backing from the European Securitisation Forum, which would “increase the availability of cash specifically targeted to new mortgage lending”.

One analyst said for the Crosby recommendations to be implemented, the industry would need new infrastructure to turn mortgages into bonds since the “master trust” platform type would be stymied by its reliance on remortgaging.

“Crosby’s recommendations ... would also make the use of revolving master trusts more challenging,” said Ganesh Rajendra, head of securitisation research at Deutsche Bank.